Management Accounting: Types, Methods, and Importance

This article discusses the concept and importance of management accounting, different types of management accounting systems, and various methods used for management accounting reporting. It also explores the benefits of presenting accurate, relevant, and reliable information in management accounting. Additionally, it explains cost calculation using marginal costing and absorption costing, and provides a calculation of the breakeven point.

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting is a process which provides the financial information or
data to the manager so that on the basis of that manager can make decision
accordingly in the organization.. It helps the management of a company in monitoring
the current process and controlling the operational activities. In the current report, the
concept and importance of management accounting has been discussed along with
discussion of various types of accounting. Excite Entertainment Ltd operates in leisure
and entertainment industry in the UK. After that the report goes on to explain the
various methods is used for accounting management reporting and a variety of costs
utilizing different techniques will be detailed in this report. Further, in this report, concept
of absorption and marginal costing will be discussed along with advantages as well as
disadvantages of various budgetary control tools that can be used. Lastly, in this report,
a comparison will be made between the different management accounting systems
which is implemented by organizations in order to solve the financial problems or crisis.
MAIN BODY
Management accounting and different types of management accounting systems
Management Accounting
Process based accounting which provides the financial information or data to the
manager so that on the basis of that manager can make decision accordingly in the
organization. This is the type of accounting which is only used by the internal
management in the organization. As in this process the management of the organization
used to use the financial report and report also invoice financial balance statement (Ax
and Greve, 2017). In simple words, It can be said that in this accounting is the process
of using statistical data to take better decision in the organization. There is no
prescribed structure or the format in which management accounting in the organization
used to take place.
Management accounting and financial accounting is two different type of the accounting
system which is used by the organization.
Basis Management Accounting Financial Accounting
Legal Requirement Management accounting is It is legally mandatory to
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not mandatory to for the
organization to have.
have financial accounting
for all the company.
Format of presentation There is no specific format
for presenting the
information and data in
management accounting.
Financial accounting used
to have the specific format
to present and record the
information.
Area of coverage within
organization
Management Accounting is
only used by the internal
team of the organization.
Financial Accounting is
used by both internal and
external stakeholders of the
organization.
Type of data used Management accounting
used to use both
quantitative and qualitative
data to measure the grid in
the organization.
Financial accounting only
uses the quantitative idea to
measure the grid in the
organization.
Different type of management accounting system
Cost Accounting System:
Cost Accounting system is the accounting system which looks at the cost factor
of the organization. As cost accounting system is the framework used by the
organization to uncerta the cost is critical for the organizational profit (Chenhall and
Moers, 2015). Excite Entertainment should have the proper idea about which service of
the organization is profitable and which one is not profitable. It can be interpreted with
the help of the cost accounting system only.
Importance
 Dis closer of profitable and unprofitable activity
 Help in making future policy
Inventory Management Systems:
As the name of the system suggest, it is the type of the management accounting
tool which used to look at the management of the inventory in an organization. This
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system used to have a combination of technology and process in the organization which
looks at monitoring and maintenance of stocked product. Products can be the company
assets, raw material or the product which are ready or in process. The essential
requirement for this management system is that it helps the Excite entertairment in
building the correlation between the organization product at different locations. Their are
two type of inventory management system.
LIFO: It is the accounting system in which the last item which is produced are
assumed as sold first.
FIFO: It is the accounting system in which oldest inventory item are recorded as
sold first.
Importance
 Improve efficiency and productivity
 Reduce inventory cost and maximize the sale
Job Costing System:
It is the another accounting tool in which manager used to delegate the cost
related to the manufacturing of individual unit of the output (Honggowati and et.al.,
2017). It is generally used when there is a big number of the product line of the
company.
Importance
 Accuracy in profitability report
Employee performance benchmarksin the amount which is incurred to produce
the product of the organization. The reason behind using cost accounting as a
management accounting tool is that estimating the cost is critical for the organizational
profit (Chenhall and Moers, 2015). Excite Entertainment should have the proper idea
about which service of the organization is profitable and which one is not profitable. It
can be interpreted with the help of the cost accounting system only.
Importance
 Dis closer of profitable and unprofitable activity
 Help in making future policy
Inventory Management Systems:
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As the name of the system suggest, it is the type of the management accounting
tool which used to look at the management of the inventory in an organization. This
system used to have a combination of technology and process in the organization which
looks at monitoring and maintenance of stocked product. Products can be the company
assets, raw material or the product which are ready or in process. The essential
requirement for this management system is that it helps the Excite entertairment in
building the correlation between the organization product at different locations. Their are
two type of inventory management system.
LIFO: It is the accounting system in which the last item which is produced are
assumed as sold first.
FIFO: It is the accounting system in which oldest inventory item are recorded as
sold first.
Importance
 Improve efficiency and productivity
 Reduce inventory cost and maximize the sale
Job Costing System:
It is the another accounting tool in which manager used to delegate the cost
related to the manufacturing of individual unit of the output (Honggowati and et.al.,
2017). It is generally used when there is a big number of the product line of the
company.
Importance
 Accuracy in profitability report
 Employee performance benchmarks
Benefits of Integrated Management Accounting
Planning: Integrated Management accounting provides the basis for the
management of Excite Entertainment in preparing plan as with the help of the
management accounting the management of the organization is able to get different
aspect information which are used by the different department in their working.
Controlling and Coordinating: Management accounting used to provide the
information to the management of Excite Entertainment about what are the hurdles
which are faced by the organization in their on the basis of that the management of the
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company used to take the corrective decision to control the operation and fixed the co
ordination between different department.
Different methods used for management accounting reporting
There are many type of management accounting reports which can be used by the
manager in the organization. Some of the common management accounting reports are
as follows:
Budget report is an internal report which is used in the management accounting
in which the management of the organization used measure difference between budget
and actual performance of business. In simple word budget report are made to find out
the deviation between the actual performance and estimated budget.
Importance There are two big Importance for the sake of which the budget report is
made in the Excite Entertainment. The first and most important Importance of budget
report is to correct the deficiency which is occurring in the operation of the business as
almost. As after getting the knowledge of the deviation, manager used to take the
decision to correct the same.
Other Importance is to relate the realistic and accuracy of the estimation which
was made by the management in the past.
Accounts Receivable Aging is another type of the management accounting
report which is based on the periodic report which is more concerned about the time. As
this report used to see company accounts receivable according to the time of invoice
has been outstanding. Generally, this report used to see the financial strength of Excite
Entertainment. This report used to manage and control the cash flow in the organization
as this tool used to extent the credit limit of the potential customer (Jansen, 2018).
Manager generally uses this type of the report to manage the collection process of the
company. This report helps the manager in having the total idea of the credit allocated
to the customer and on the basis of same manger used to take the corrective action to
tighten the policy of the organization.
Job cost report is the another form of the report in management accounting
which is used by the manager to analyses all the expense related to one specific
project. This is the report in which the manager used to find the deviation between the
revenue which was in real incurred and the revenue which was estimated in the past.
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After finding the deviation manager used to put the effort to reduce the deviation and
improve the performance of the organization.
Inventory and manufacturing report is the another report which is made in the
organization to support the management accounting in the organization. This report of
the organization used to look at the amount of the equipment left in the organization and
the reorder time of the equipment this help the business in managing the inventory in
efficient way. This report also includes the information regarding the waste, labor cost
and overhead cost. This information helps Excite entertainment manager in getting the
perfect knowledge about the position of the business on the basis of that manager used
to plan different activity in an organization.
At the same time, it is also very important for the organization to check the
reliability and accuracy of the information which has been used to prepare the
management accounting. The biggest reason for the same is it may have laid to the
wrong decision making in the organization as outcome of the management accounting
is over depended on the accuracy of the information which has been collected (Khan
and Jain, 2018). Organization also has to make sure that the data on which the
accounting function in the organization has taken place are updated one as data used
to change on the regular time interval for the organization. Management accounting
done on the outdated data may create the situation in the organization where manager
used to implement the decision based on the previous problem which will overlook the
issue faced by the company in today's scenario.
Importance of presenting accurate, relevant and reliable information
Accurate, relevant and reliable information management accounting will bring the
variety of the benefit for the organization and the stakeholder of the company. Some of
the benefit are as follow:
Control: This is the biggest benefit which is enjoyed by the owner and the
stakeholder of the organization that they will be having the proper knowledge of the
current situation of the organization. It will help them in having the proper control over
the functioning of the organization and can take the different action depending upon the
information.
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Assessing the Problem: Accounting done with the help of Accurate, relevant and
reliable information information will help the company in assessing the solution of the
problem on time. As by comparing the management accounting report of two time
interval manager can easily uncertain the deviation and the issue which is faced by the
organization in the past on the basis of same manager or shareholder can take the
corrective action in the organization.
Cost Calculation
Marginal costing can be defined as that costing technique under which the
variable cost belonging to per unit is charged to each unit and the fixed cost is deducted
from the contribution only. Marginal costing helps in determining the additional cost that
is incurred in producing one extra unit (Chenhall and Moers, 2015).
Absorption Costing on the other hand can be defined as a costing method
through which every single cost incurred in manufacturing of the product is associated
with it by charging it to the cost of units. These costs involve direct and indirect costs,
rent, insurance etc. are associated with these costs (Bui and De Villiers, 2017). All the
direct costs are attributed directly to the cost of the product long with fixed overheads
cost.
Formulas
Marginal Costing: Direct material + Direct Labour + Direct Expenses + Variable
Overheads
Absorption Costing = (Direct Labour Cost + Direct Material Cost + Variable
Manufacturing Overheads + Fixed Manufacturing Overheads)/ Number of Units
produced
Calculation according to Marginal Costing:
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Figure 1: Marginal Costing
Calculation according to Absorption Costing:
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Figure 2: Absorption Costing
Interpretation: In both the calculations made above, profit statement has been
made using absorption and marginal costing methods for the Excite Entertainment
Limited. It can be clearly interpreted that the profit under absorption costing is more as
compared to the profit under marginal costing i.e. of the company adopts absorption
costing the profit would be £40000 and under marginal costing it is only £32000.
Therefore, in order to calculate their profits and distribute profits accordingly, the
company should adopt absorption costing rather than marginal costing method.
Absorption costing method is in compliance with the GAAP Standards and further it
takes into account the fixed overhead cost which is attributed to the products
manufactured and therefore it depicts truer image of profitability rather than skewing it
unnecessarily thus depicting a truer image as compared to the marginal costing method
(Agrawal and Cooper, 2017).
Calculation of Breakeven
BEP (in units): Fixed cost / contribution per unit
BEP (in £): BEP units * Selling price per unit
Calculation of Contribution:
Particulars Figures
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Selling price per unit (SPU) 40
Variable cost per unit (VCPU) 10
Contribution per unit (SPU – VCPU) 30
Fixed cost 120000
BEP (in units) 120000 / 30 = 4000
BEP (in £) 4000 * 40 = 160000
This concludes that at this point that 4000 tickets can be sold i.e. the revenue incurred
will be 160000 at which point the revenue incurred matches with the expenses made by
the company.
It can be clearly interpreted for the contribution calculation made above that per
unit contribution for each ticket is only £30 per ticket. Contribution i.e. the profit is
calculated by deducting variable cost per unit form the selling price per unit.
Now the manager of the Excite Entertainment wants to enhance his profit upto
£90000 and in order to do this, he has to increase the sale of the number of tickets of
the Excite Company. In order to calculate the approximate number of tickets that the
company should sell, it has been assumed that the total number of tickets currently
being sold in 1000 tickets.
Now estimates sales can be calculated by:
Units need to sell for attaining desired profit Fixed cost + desired profit / contribution per
unit
Particulars Figures (in £)
Fixed cost 120000
Desired profit 90000
Contribution per unit 30
Tickets need to sell for attaining desired profit 7000
Therefore, in order to attain the desired profit, the excel entertainment company needs
to sell 7000 tickets.
Advantages and disadvantages of planning tools used for budgetary control
Budgetary control involves preparation of a variety of budgets and under this a
financial statement is prepared which depict the cost is allotted and segregated to each
probable expenditure and also illustrates the variety of revenue options and the total
revenue that is incurred collectively form every source. By incorporating tools like
budgets in their planning, management is able to track their financial expenditure and
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revenue generating sources in a better manner so that all the expenditure can be
accounted for (Bennett and James 2017). Budget variance is the difference between
what was expected by the organization and the actual budget of the organization. There
are three major classification in the type of budgets that can be used by the managers
of Excite Entertainment:
Cash Budget: This kind of budget is used for depicting all the cash transaction
of a company i.e. various inflow or sources of cash generation and the various outflow
or expenditure of the cash or cash receivables in a company. This help the organization
in having the idea of the cash and cash equivalent of the company on the basis of that
different investment decision are taken in the organization. However, there are both
positive as well as negative outcomes associated with this type of budgetary control
tool:
Advantages Disadvantages
Cash budget is often used in preparation
of financial statements and therefore
increase the control in determining what
the various inflows and outflow sources
of the cash so that it can be regulated in
a better manner. It also facilitates in
simplifying the process of determining
the amount of cash that was retained in
the business.
It is an extremely tedious and lengthy
process since identifying and accounting
for each and every expenditure or income
that the company might have incurred in
the business and therefore the entire
process of preparing a budget becomes a
complicated one and requires lot of time.
Fixed Budget: This type of budget can be defined a constant or static budget i.e.
irrespective of the increase or decrease in the revenue generation of the company i.e.
the sales of the company, this budget remains fixed and the cost allocations do not
change. This help the company in looking at the long term goal of the business and
focusing on the same (Maas, Schaltegger and Crutzen, 2016).
Advantages Disadvantages
Fixed budget has constant figures which
do not change with changing revenue
Due to the budget being static, the biggest
drawback is that it lacks any flexibility and
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levels and therefore it is easier to
prepare this kind of budget and further,
the comparison of the budget also gets
easier which further simplifies the
process of forecasting helping in
formulation of relevant budgets.
cannot be modified with changing revenue
levels. Further, it can be stated that it does
not take into the changing market
conditions in which the market is
operating.
Flexible Budget: The flexible budget changes as per the various sales level that
is constantly changing in the market and therefore the cost allocations change
accordingly. This help the Excite Entertainment in coping up with the changing
environment in the market.
Advantages Disadvantages
Flexible budget assists the company in
comparing the actual sales with the
estimated sales and therefore this further
helps in identification of the reasons
behind under performance or over
performance and organizations such as
excite entertainment whose sales
change regularly are good examples.
The entire process is extremely complex
and it gets difficult to regularly record the
changes in sales and adjust the budget
accordingly time and again (Kaplan and
Atkinson, 2015). Therefore the preparation
of this kind of budget is an extremely
elaborated and long process.
Compare how organizations are adapting management accounting systems
Financial Governance
Financial governance refers to the way a company operates the financial
information in the organization. This way includes the collection, management and
monitoring of different financial document.
Compliance system
Compliance system is the best practice program designed in the organization to
keep the organization on the right side of the fair leading regulation of the country. It is
the program which comprise written document, functions, processes which used in
compiling with different legislation and law. Compliance system used to look at all the
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functional area of the organization from the sales to the advertising and operation of the
organization There are four area focus in the compliance system namely Board of
director oversight, compliance program, consumer complaint response and Audit (Mack
and Goretzki, 2017).
A well compiled compliance program used to see the following points
 Prevent or reduce regulatory violations
 Protect consumer from non compliance and associated harm
 Help the organization in shielding the organization from the risk of litigation which
may negatively impact such as revenue, operation focus and brand reputation
 It also helps the organization in building good goodwill which may help the
company in attracting and retaining the customer in the organization. There are
many type of the consequences which has to face by the organization due to the
non compliance in the organization. Some of the consequences of non
compliance in the organization are as follow:
Penalties: Non compliance in the organization has some sort of the penalty which
has to be paid by the company. Penalty used to vary depending upon the type of the
non compliance (Mills, 2018).
Reputation of the company: A non compliance in the organization always harms
the reputation of the company as any issue can put a company in trouble, which will
eventually affect the brand value of the organization.
Time consuming: To uncover the reason of noncompliance in the organization
organization may have to conduct the different audit in the organization which may
consume the time for the organization.
Imprisonment: In some serious cases non compliance in the organization may lead
to imprisoned for the owner of the organization.
Monitoring System
Bench marking: It is one of the common monitoring system in which Excite
Entertainment used to measure the policy, process and product on the basis of the
already set standard of measurement (Quattrone, 2016). In this process manager used
to set the standard on the basis of the expectation of the company and organization
used to achieve the same standard. After that manager used to measure the current
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performance and used to compare the both. This help the manager of Excite
Entertainment in measuring the real outcome of company. There are two type of bench
marking i.e. internal bench marking and external bench marking. Internal bench marking
in which the performance are measure of own company and in external bench marking
the performance are measure with of competitor. Generally this is used to find out the
issue of low sales and income after finding the deviation manager used to apply
different policy to improve the same in the organization.
Balancing Scorecard: This is the monitoring system which looks at improving
the various internal system of the Excite Entertairment. This measuring system used to
look at the 4 segment of the business that is financial, customer, internal business
process and learning and growth. In simple word it used to help the company in looking
at the internal factor affecting the performance of the business.
All the organization in real used to adopt the different type of the management
accounting measurement tool in the organization depending upon the situation of the
business. As the organization which is included in the manufacturing of the product
used to adopt the bench marking tool which help the company in getting best outcome
of the product (Yermack, 2017). At the same time the organization who used to provide
the service always try to adopt the balancing scorecard as internal factor are more
important for service providing organization.
CONCLUSION
This report summarized that management accounting is the internal management
accounting tool which used to help the manager in decision making. After that the report
summarized that there are many accounting report namely inventory report, cost report
which used to support the management accounting. After that the report summarized
that Absorption costing is the better suitable accounting method for the organization. In
the end the report summarized how different organization used to adopt the accounting
system.
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